Page 42 - FINAL CFA SLIDES DECEMBER 2018 DAY 14

LOS 51.h: Describe structured financial Session Unit 14:

instruments., p.25 51. Fixed income markets: issuance, trading and funding

• Yield enhancement instruments include credit linked notes, which are redeemed at less than

par value if a specified credit event occurs on a reference asset, or at par if it does not occur.
The buyer receives a higher yield for bearing the credit risk of the reference asset.

• Capital protected instruments offer a guaranteed payment, which may be equal to the
purchase price of the instrument, along with participation in any increase in the value of an

equity, an index, or other asset.
• Participation instruments are debt securities with payments that depend on the returns on an
tanties
asset or index, or depend on a reference interest rate. One example is a floating rate bond,

which makes coupon payments that change with a short-term reference rate, such as LIBOR.
Other participation instruments make coupon payments based on the returns on an index of

equity securities or on some other asset.
• An inverse floater is a leveraged instrument that has a coupon rate that varies inversely with a
specified reference interest rate, for example, 6% – (L × 180-day LIBOR). L is the leverage of

the inverse floater. An inverse floater with L > 1, so that the coupon rate changes by more than
the reference rate, is termed a leveraged inverse floater. An inverse floater with L < 1 is a

deleveraged floater.